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RateSetter CEO talks to AltFi about his firm’s decision to “lance the boil”, the ensuing fallout, and how the platform was able to deliver for its customers.

To begin, a reminder of how interest rates are set, both for lenders and borrowers, on the pioneering P2P platform RateSetter:

“It’s supply and demand, and supply is made up of two things: new money and reinvesting money. And demand is two things: it’s new borrowers and it’s also lenders looking to sell out. Our system groups those two together in a way that is not the case with other peer-to-peer lenders,” explained Rhydian Lewis (pictured), co-founder and CEO of RateSetter. Bear this in mind as we delve deeper into how the company was able to deliver on £35m of sell orders within just one crucial month.

The background to this has been well-documented, but as a refresher: RateSetter offered its investors a free sell-out option between 18 July and 17 August, following the publication of new information about certain of its former wholesale lending partners. Perhaps most significant was the revelation that Adpod Limited, which had taken a £12m loan from Vehicle Trading Group (itself funded by RateSetter), had got into trouble – and that RateSetter would be absorbing any losses incurred from the loan using its balance sheet.

“The mistake was monitoring,” said Lewis. “We had a partner that we were not monitoring sufficiently.”

Mistake made, RateSetter then took the decision to offer fee-free sell-outs to its investors. But it was not, contrary to speculation, obliged to do so.

“We felt that we had made a mistake, and rather than spending the rest of our lives apologising and feeling that we had to explain ourselves again and again and again, the right thing to do was to give everyone all the information and the ability to act on that information there and then,” said Lewis. “To lance the boil, the best thing to do was to make a very open offer.”

The offer was made, and RateSetter’s investors responded. At one stage during the window, the platform was faced with £41m in sell orders. RateSetter was able, via its communications with investors, to bring that number down to £35m by the time the window closed.

“We delivered, to the penny, the full £35m, within the month,” said Lewis. “There was no outside funding.” He rightly sees this as a success for the business – not least because it represents, in his words, “a good customer outcome”.

But how was RateSetter able to achieve this? It looked like the platform might be overwhelmed by sell orders, particularly at a time when (bearing in mind the revelations about its former wholesale partners) one might imagine its investors’ feet were cooling. Quite the opposite turned out to be true. The £35m was absorbed by two things; the first was an increase in the inflow of money.

“Our rates went up by a full percentage point and more, and we saw money go from about £4-5 million of inflows a week to about £8-9 million,” said Lewis. At the same time RateSetter was busy winding up its wholesale lending activities (because these were deemed to constitute deposit-taking), and so the loanbook was repaying “in an accelerated fashion”.

Why did inflows increase? It’s simple enough. “It’s a lot to do with psychology… Generally, one has to believe that people are going to be more attracted to a higher rate if they feel that it’s deliverable,” said Lewis.

The sudden rush to exit the platform – equating to £35m of sell orders – served to boost the returns available to new investors. Those shifted from around 2.9 per cent to around 4.5 per cent during the month-long window.

At the same time, RateSetter moved to reduce origination volumes. Suddenly, the business went from lending £12m a week in July down to a low point of £6.3m in mid-August. Recall Lewis’s explanation of how the RateSetter marketplace balances supply and demand: new loans and lenders looking to sell out are, in essence, the same thing.

“Rather than a borrower borrowing £5k, a lender is able to get their money out, because our system sees demand as a lender withdrawing or a borrower borrowing.”

Rates were going up, with “demand” for new money soaring, despite the fact that originations were being reduced.

(As something of an aside, Lewis says that he learnt valuable lessons during this period about how best to dial down, and subsequently re-energise, borrower demand. “Dialling things down needed to be handled very carefully, because we’ve built up origination in different lending classes, and some of them are more easily dialled up and dialled down,” he said. “Some, if you dial down, you probably lose that origination channel forever.”)

“The rates went up sufficiently for some people with eyes wide open to say: ‘that’s attractive enough for me to go back in’. What I think is interesting about that is if we had controlled our rate, in the way that a bank does (or other peer-to-peer lenders do), one: I think we would have been too slow to react. It would have taken us a week to decide and perhaps that wouldn’t have been quick enough. And two, the fact that we are seen to be raising the rate would have sent an alarm to our customers that we are short on money, whereas in actual fact, they could see that supply and demand in the market was out of whack. The psychology changed, and I think that that small thing mattered for us in that period.”

It was mission accomplished, as far as the fee-free window was concerned. But are things now returning to normal?

“Last week was a best week since March,” said Lewis, referring to lending volumes. “Lender inflows are about £9m a week. The business is growing again and it’s back at the level it was at before this. It’s bounced back quickly.”

In other respects, however, RateSetter (now fully authorised) seems largely back on track – and Lewis thinks the outcome of the episode is, in fact, one for the P2P lending industry to be proud of.

“All of this has forced us to face up to a lot of challenges in an accelerated period of time, completely self-imposed in some respects… One can either look upon this as some terribly embarrassing mistake, or you can think of it as the kind of thing that is the making of it [peer-to-peer lending],” he said.

“It was an outcome that was so clearly a good customer outcome. Peer-to-peer lending should be shouting from the rooftops about that.”

While reticent to come across as “worthy” (his own word), Lewis closed the interview by imparting a key lesson from RateSetter’s summer of struggle.

“Don’t be scared about admitting to a mistake and put the customer first,” he said.

7th December 2017Ryan Weeks

11th December 2017Karen G. Mills

8th December 2017Ryan Weeks

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